ALBERT EDWARDS: China Is 'Stuck Between A Rock And A Very Hard Place'

Societe Generale’s Albert Edwards is worried about rising inequality as a source of social unrest in China.

Indeed, recent studies and surveys show that inequality has been on the rise since the financial crisis.

Photo: Societe Generale

Around the world, policymakers’ have embarked on aggressively easy monetary policies in their efforts to stimulate their economies. One of the consequences of this path has been depreciating local currencies, which make local goods more attractive in the export market.But Edwards is having a hard time understanding why China has let its currency rise to 19-year highs against the dollar.

“Why has China backed off its recent inclination to join the global currency war?” he asks. “What on earth is going on?”

One explanation he see was recently put for by the Financial Times. Edwards writes:

One theory cited is that the US presidential election (and the IMF meetings in Tokyo) could be playing some part, and that China is quietly engineering currency appreciation behind the scenes. A stronger renminbi, the theory goes, might improve the re-election hopes of Barack Obama, who has sounded less aggressive than his rival Mitt Romney on China. That seems plausible and on that view the renminbi will resume its slide after the US elections.

In other words, a strengthening currency, while bad for China, is good for Obama’s reelection prospects. In theory, this short-term cost would be much more palatable than a Romney presidency which would be bad news for China in the long-term.

Regardless, even if China were to push forward with renminbi-weakening policies, this would raise the risk of inflation.

“[N]ote that rising prices, although much less of a concern than in 2008 is still THE most important issue,” writes Edwards. “Could this prevent yuan devaluation from being used as a policy lever as it will lead to higher food prices?”

“China’s policymakers are stuck between a rock and a very hard place indeed.”